REIT Stocks to Get Boost from New S&P Sector Classification

Shares of Real Estate Investment Trusts should get a bump up this year as mutual fund managers buy ahead of a September move by Standard & Poor's to create a new real estate sector in its classification systems.

By some reckoning, fund managers could direct as much as $100 billion at the sector as they try to boost REIT holdings to their market weighting. That is the expectation of JPMorgan Chase & Co., which has calculated that funds had only about half as much in REIT stocks as they should if they want to mimic the S&P500.

Others see less buying than that, but still see a net positive effect from the S&P move, which was originally announced in November 2014.

Standard & Poor's will add real estate as an 11th sector to its Global Industry Classification Standard (GICS) structure after the close on Aug. 31. The changes will take effect after the close on Sept. 16 in order to coincide with S&P's annual rebalance of its indexes.

"They are going to see more demand and those stocks could work because people need to add weight," said Matthew Spitznagle, senior equity analyst for Eagle Asset Management in St. Petersburg, Florida.

REITs already have been outperforming the S&P 500 this year, with the Vanguard REIT index fund, a broad representative of the sector, up more than 4 percent against the S&P's barely positive 0.01 percent.

That reverses the trend from 2015, when investors fearing the Federal Reserve would aggressively raise interest rates sold the group and the fund fell 1.6 percent for the year.

Rising rates increase costs for REITs that have to borrow heavily for new investments. REITs are also attractive to investors for their high dividends in periods of low bond yields.

The new attention from S&P may buoy REITS to a far lesser degree than JPM sees, and the bump may be temporary. Because the S&P500 is a so-called market cap index - each company in it is weighted by its market capitalization - the mere creation of a sector does not actually change the makeup of the index.

Index-fund managers already have the right amount of real estate for tracking the S&P; that is how their funds operate. Active fund managers may buy more real estate investments because they believe the new status makes the sector more important, or because they simply think that in a low-rate environment, the REITS are good to hold.

Bank of America Merrill Lynch recently forecast much more modest inflows of $5 billion to $8 billion for REITs, should active managers move their underweight rating to match those of the telecom and utilities sectors, which are also known for their high dividend yields.

Tom Bohjalian, manager for Cohen & Steers real estate securities portfolios in New York, said broader ownership resulting from the new sector creation will dampen volatility, but he is not expecting the biggest possible boost.

"It has been said if everyone got to market weight it would be $100 billion of buying power. Yes, that would be really great if that occurred," he said.

But he expects any investor move to REITS to be slower and more deliberate. .

Shares of Real Estate Investment Trusts should get a bump up this year as mutual fund managers buy ahead of a September move by Standard & Poor's to create a new real estate sector in its classification systems.